Charitable Remainder Trust (CRT) Trustee Issue

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plannerman
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Charitable Remainder Trust (CRT) Trustee Issue

Post by plannerman »

I'm working to set up a testamentary CRT to hopefully stretch the proceeds from a traditional IRA over the life of the income beneficiary.

I have found a charity whose objectives and investment policy are in sync with my own. Moreover, they will also act as the trustee and provide the necessary trust administration services, as long as the charity's remainder interest is above a specified minimum percentage.

So far so good.

I am somewhat uncomfortable with the potential for self-dealing since there is an incentive for the trustee to maximize the remainder interest at the expense of the income beneficiary. In addition, there is always a possibility of just plain poor performance or malfeasance on the part of any trustee.

In drafting the trust document, I requested that my attorney include a clause that would allow for replacing the charity as the trustee (but the charity would still get the remainder interest). The charity has balked at this condition.

Are my concerns valid? Is this an unreasonable request? Is there a better way to deal with this issue? Should I go with an independent corporate trustee?

I’m sure this has come up before, what are best practices for situations like this?

plannerman
bsteiner
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Re: Charitable Remainder Trust (CRT) Trustee Issue

Post by bsteiner »

Why would you want the charity as trustee? They would control the investments, and would probably incur higher costs.

Do you have friends or family who could serve as trustee(s)? Could the individual beneficiary be a trustee, perhaps together with someone he/she would want as co-trustee?

That will allow you to give the individual beneficiary the power to change the charities in whole or in part.

It would also give the individual beneficiary some control over the investments. He/she has an interest in how the trust assets are invested, since how the assets are invested will affect how much he/she will receive (assuming, as is likely, that it's a unitrust).

Also, by having your own lawyer prepare the trust, you can more easily optimize the payout rate so that the actuarial value of the charity's interest is the minimum 10% of the value of the trust as of the inception.
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plannerman
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Re: Charitable Remainder Trust (CRT) Trustee Issue

Post by plannerman »

Bruce,

Thanks for the reply.

The reasons I wanted to use the charity as the trustee are 1) I didn't want to burden any family members with the ongoing trust administration, 2) the beneficiary is not in a position to either be a trustee or to participate in the investment decisions, 3) the charity will do this for a relatively small fee and 4) they currently have a well-respected investment committee.

I’m also more interested in maintain a steady or growing income stream over the life if the beneficiary than I am in maximizing the total return. Worst case would be for the real value of the income stream to decline to say 50% in 25 years or so..

This charity has the software to calculate the charity's present value remainder interest online. I can use it as a tool to help decide what unitrust percentage I need to specify.

But it's risky and I'm conerned about the potential for self dealing. Any ideas on mitigating the risk?

plannerman
bsteiner
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Re: Charitable Remainder Trust (CRT) Trustee Issue

Post by bsteiner »

plannerman wrote: Tue Oct 26, 2021 4:23 pm Bruce,

Thanks for the reply.

The reasons I wanted to use the charity as the trustee are 1) I didn't want to burden any family members with the ongoing trust administration, 2) the beneficiary is not in a position to either be a trustee or to participate in the investment decisions, 3) the charity will do this for a relatively small fee and 4) they currently have a well-respected investment committee.

I’m also more interested in maintain a steady or growing income stream over the life if the beneficiary than I am in maximizing the total return. Worst case would be for the real value of the income stream to decline to say 50% in 25 years or so..

This charity has the software to calculate the charity's present value remainder interest online. I can use it as a tool to help decide what unitrust percentage I need to specify.

But it's risky and I'm concerned about the potential for self dealing. Any ideas on mitigating the risk?
Unless you know what the Section 7520 rate (the interest rate that the IRS uses for this purpose) will be at the time of your death, you would probably do it by formula. In other words, the unitrust payment will be that percentage such that the actuarial value of the charity's remainder interest will be 10% of the initial value of the trust.

There isn't much to do in administering the trust. You have to invest the assets. You would probably want it to be mainly in stocks both to invest for the long term and also since qualified dividends are taxed at lower rates than ordinary income. Once a year you have to multiply the value as of the end of the previous year by the unitrust percentage. You have to file annual tax returns. At least for the first year, you would probably have an accountant do them. Any of the medium size firms should be able to do them, and some small firms can also do them.

Find out the all-in costs, including investment management, if the charity is the trustee. You can give the beneficiary the power to change the trustee and the power to change the charities as to some or all of the remainder.
inbox788
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Re: Charitable Remainder Trust (CRT) Trustee Issue

Post by inbox788 »

plannerman wrote: Tue Oct 26, 2021 6:07 am I'm working to set up a testamentary CRT to hopefully stretch the proceeds from a traditional IRA over the life of the income beneficiary.

I have found a charity whose objectives and investment policy are in sync with my own. Moreover, they will also act as the trustee and provide the necessary trust administration services, as long as the charity's remainder interest is above a specified minimum percentage.

So far so good.

I am somewhat uncomfortable with the potential for self-dealing since there is an incentive for the trustee to maximize the remainder interest at the expense of the income beneficiary. In addition, there is always a possibility of just plain poor performance or malfeasance on the part of any trustee.

In drafting the trust document, I requested that my attorney include a clause that would allow for replacing the charity as the trustee (but the charity would still get the remainder interest). The charity has balked at this condition.

Are my concerns valid? Is this an unreasonable request? Is there a better way to deal with this issue? Should I go with an independent corporate trustee?

I’m sure this has come up before, what are best practices for situations like this?

plannerman
What type of charity is this? What is the size and number of personnel staffed to administer these trusts and investments? Other than larger education and religious organizations, I'd be a little weary too. Even 3rd party administration may have succession issues over a beneficiary lifetime.
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plannerman
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Re: Charitable Remainder Trust (CRT) Trustee Issue

Post by plannerman »

The charity is a regional Community Foundation. They have been in existence for over 40 years and manage about $300 million in investments. They are home to over 1200 funds including donner advised, bequests, corporate, CRTs, CRAs, etc. funds. Their financial results are published on their website and have historically been stellar. One of their investment choices is a passive portfolio of Vanguard funds that looks very much like my personal portfolio.

My only concern is they are baulking at my request that there be a mechanism specified it the CRT to replace them as trustee in case something changes.

I'm wrestling with whether this is a deal breaker or not.

plannerman
bsteiner
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Re: Charitable Remainder Trust (CRT) Trustee Issue

Post by bsteiner »

plannerman wrote: Wed Oct 27, 2021 6:23 am The charity is a regional Community Foundation. They have been in existence for over 40 years and manage about $300 million in investments. They are home to over 1200 funds including donner advised, bequests, corporate, CRTs, CRAs, etc. funds. Their financial results are published on their website and have historically been stellar. One of their investment choices is a passive portfolio of Vanguard funds that looks very much like my personal portfolio.

My only concern is they are baulking at my request that there be a mechanism specified it the CRT to replace them as trustee in case something changes.

I'm wrestling with whether this is a deal breaker or not.
It would be for me. Why should they be locked in?

While community foundations have a purpose (see below), they usually cost about 1% a year.

Community foundations can be useful in some cases.

One is where you know what kinds of things you want to provide for but you don't know which charities do those things. A community foundation can ascertain which charities will do those things. One client did this.

Another is where you're concerned that a charity might fail. A client wanted to endow a scholarship at a new private middle school for children at risk, but was concerned that the school might fail. She considered using a community foundation that would distribute the same amount of money to the school each year. If the school were to fail, the community foundation could make the distributions to another school as similar as possible to that one.
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Lee_WSP
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Re: Charitable Remainder Trust (CRT) Trustee Issue

Post by Lee_WSP »

I would never nominate or advise anyone to nominate a corporate/charitable/any trustee that refused to agree to a removal provision. I can understand a reasonable wind down period, but no more.
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